KEY RATING DRIVERS
The upgrade of the IDRs for AXL and AAM is supported by the fundamental improvement in the drivetrain and driveline supplier's credit profile over the past several years. AXL continues to benefit from strong pickup truck and sport-utility vehicle (SUV) production at its largest customer, General Motors Company (GM), while it also continues to diversify its overall book of business. Sales of the company's EcoTrac disconnecting all-wheel drive (AWD) system, offered initially on
Looking ahead, Fitch continues to expect AXL's business to become further diversified, which will lessen the company's outsized reliance on GM's U.S. light truck production. Passenger car, crossover, and commercial vehicle programs will comprise an increasing proportion of the company's revenue, while a growing list of global customers will reduce the concentration of the company's customer base. AXL's backlog of new business launching between 2014 and 2016 currently stands at
Fitch's concerns include the continued concentration of AXL's revenue base, despite the increased diversification; the potential for operational issues to arise with the substantial amount of launch activity expected over the intermediate term, much of it with new customers; and the sensitivity of the company's credit metrics to changes in its operating performance. Although Fitch expects AXL to continue diversifying its book of business, GM is likely to remain the company's largest customer by a wide margin for a number of years. In addition, AXL is likely to remain heavily exposed to any production volume changes in GM's light truck program. A decline in demand for GM vehicles, especially its light trucks, would have a significant impact on AXL's financial performance. At the same time, new product launch activity, especially with new customers, increases the risk of potential startup issues. Although AXL smoothly launched a number of programs over the past year, launch issues in late 2012 and early 2013 had a material effect on the company's credit profile. Fitch also notes that AXL's credit protection metrics are quite sensitive to fluctuations in the company's operating performance, and a steep decline in production or potential launch issues could lead to a rapid deterioration in its overall credit profile.
Free cash flow (FCF) (calculated as net cash from operations less gross capital expenditures) in the 12 months ended
AXL's overall liquidity remains adequate to meet the company's cash needs. Cash and cash equivalents at
AXL's leverage (debt/Fitch-calculated EBITDA) declined during the 12 months ended
Fitch no longer views the funded status of AXL's defined benefit pension plans as a significant credit risk. At year-end 2013, the plans were 94% funded on a projected benefit obligation (PBO) basis, equating to only a
Consistent with its 'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers', Fitch has affirmed AAM's secured revolving credit facility and secured Term Loan A ratings at 'BB+'. The recovery rating of 'RR1' has been withdrawn, as Fitch does not assign recovery ratings to issuers with IDRs of 'BB-' or higher. Concurrently, Fitch has upgraded AAM's senior unsecured notes rating by two notches to 'BB-' from 'B/RR5'. At the 'BB-' IDR level, secured issue ratings are typically one to two notches above the IDR, while unsecured ratings are typically rated at the same level as the IDR. The rating of 'BB+' on AAM's secured revolver and Term Loan A reflects their collateral coverage, which includes virtually all the assets of AXL and AAM. The two-notch upgrade of AAM's senior unsecured notes incorporates Fitch's expectation that the company's improved financial performance would lead to average recoveries in a distressed scenario.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Continued progress on diversifying the company's revenue base.
--Sustained positive FCF.
--A decline in EBITDA leverage to below 3x for a sustained period.
--Sustained EBITDA margins of 12% or higher.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Significant production inefficiencies and associated cash burn tied to the start-up of new programs.
--A rise in EBITDA leverage to above 3.5x for a sustained period.
--A sustained decline in the EBITDA margin to below 10%.
--Sustained negative FCF.
--An unexpected prolonged disruption in the production of GM's full-size pickups and SUVs.
Fitch has taken the following rating actions with a Stable Outlook:
--Issuer Default Rating (IDR) upgraded to 'BB-' from 'B+'.
--IDR upgraded to 'BB-' from 'B+';
--Secured revolving credit facility rating affirmed at 'BB+';
--Secured Term Loan A rating affirmed at 'BB+';
--Senior unsecured notes rating upgraded to 'BB-' from 'B/RR5'.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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